Notes of Corporate Finance

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Share options and convertible bonds; diluted EPS;

EBITDA: the cash a firm has earned from its operations

- The statement of cash flow

- Operating activities:

adjust net income to cash flow:

add back non-cash expenses(amortization and depreciation/ deferred taxes…); adjust for changes to net working capital that arise from changes to accounts receivable, accounts payable, or inventory.(deduct AR, add AP and deduct I); add depreciation

- Investment activity:

Capital expenditures: purchases of new property, plant and equipment

- Financing activity:

Dividends paid to shareholders, cash received from the sale of its own shares, or cash spent buying its own shares, changes to short-term and long-term borrowing

Retained earnings= net income – dividends;

Payout ratio is the ratio of its dividends to its net income

- Profitability ratios

Gross margin=gross profit/sales

Operating margin=operating income/sales

EBIT margin=EBIT/sales

Net profit margin=net income/sales

- Liquidity ratios

Current ratio= current assets/current liabilities

Quick ratio=(current assets-inventory)/current liabilities

Cash ratio(most stringent)=cash/current liabilities

- Asset efficiency

Asset turnover=sales/ total assets

Fixed asset turnover=sales/fixed assets

- Working capital ratios

Accounts receivable days=accounts receivable/average daily sales (accounts payable days and inventory days)

Inventory turnover ratios=cost of goods sold/ inventory

- Interest coverage ratios (times interest earned ratio)

A measure of earnings divided by interest, earnings can be operating income, EBIT or EBITDA

- Leverage ratios: the extent to which it relies on debt as a source of financing

Debt-equity ratio=total debt/total equity (usually use market value)

Debt-to-capital ratio=total debt/(total equity + total debt)

Net debt=total debt - excess cash & short-term investments

Debt-to-enterprise value ratio= net debt/(market value of equity + net debt)

Equity multiplier= total assets/ book value of equity (measure the amplification of the firm’s accounting returns that results from leverage)

- Valuation ratios

Price-earnings ratio(P/E)=market capitalization/ net income = share price/ earnings per share (a simple measure that is often used to assess whether a share is over- or under-valued)

PEG ratio= P/E to Growth

- Investment returns

Return on equity(ROE)=net income/ book value of equity

Return on asset(ROA)=(net income + interest expense)/total assets

Return on invested capital(ROIC)=EBIT(1 – tax rate)/(book value of equity + net debt)

- The Dupont identity

ROE=net income/total equity= profit margin * asset turnover * equity multiplier

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Chapter3

- Competitive market price

Valuation principle

Law of one price

Arbitrage opportunity

- Time value of money

Interest rate and interest rate factor

Net present value

Discount factor and discount rate

- Compounding

Compound interest

Discounting

Chapter 5

Interest rates: the price of using money

- The effective annual rate(EAR) or annual percentage yield(APY)

Equivalent n-period Discount Rate = (1+r)^^n-1

- Annual Percentage Rate(APR): the amount of interest earned without effect of compounding

1+EAR=(1+APR/m)^^m

- The determinants of interest rates

Fundamentally, interest rates are determined by market forces based on the relative supply and demand of funds.

Some factors may influence interest rates:

- Inflation

Inflation measures how the purchasing power of a given amount of currency declines due to increasing price.

Nominal interest rates: indicate the rate at which your money will grow if invested for a certain period

Real interest rate: the rate of growth of your purchasing power, after adjusting for inflation

Real rate= (Nominal rate- Inflation rate)/(1+Inflation rate)

- Investment and interest rate policy

Lower interest rates to stimulate investment